1) Put It On Paper (POP your finances).
Sit down with pen/pencil & a piece of paper. Draw a line down the center of the page. On one side, write how much money you bring home each month. This is your NET income (after taxes). On the other side of the page, write how much money is going out each month. This is EVERYTHING. All your monthly bills, food, clothing, cell phone, car payment, all of it. Don’t forget entertainment, alcohol/cigarettes & mall shopping. Subtract the total minimum monthly payment of all bills from total net income. Hopefully that number is positive. If it’s negative, you’ve got work to do.
2) Stop Borrowing Money
The boat is leaking and we need to stop us holes before we can bail the water out. You’ve got to stop borrowing money, at least until you get your finances (I mean your mind) under control. If this means cutting up credit cards, do it. If it means driving that same old car with 200,000 miles and a dented fender, do it. Whatever it takes to stop water from coming into the boat. Borrowing money is promising your future labor to a lender. Borrowing money is contracting your future labor. Borrowing money and paying interest is nothing more than renting someone else’s money. There’s nothing wrong with borrowing money. You just don’t have to make those rent payments for the rest of your life, if you don’t want to.
3) Pay Off Debt
On another piece of paper list all your debts. These are the things that can be paid off, not expenses like lights, water, groceries, etc. This is mortgage, cars, student loans, credit cards, etc. List the highest balance debt first down to the smallest balance debt last. Now focus on the smallest balance debt, regardless of interest rate. Add to that debts minimum monthly payment a portion of your monthly net income. I recommend 10% if you can swing it. If 10% is impossible, (for now), add 5%. Now take the minimum monthly payment for that smallest balance debt, add 5% of your net income (or whatever you decided) to that. Divide that number into the smallest balance debt. That’s the number of months it will take you to pay off that debt. When that debt is paid off, take the total payment you were making on that smallest debt (minimum monthly payment + 5% of your net income) and add it to the next smallest balance debt’s minimum monthly payment. Do the math again and see how fast you’ll pay it off. For the rest of your remaining debts, lather/rinse/repeat.
4) Save 3 to 6 mos. of living expenses.
Once all your debt is gone, or all of it but your mortgage, you can now easily save an emergency fund. You decide how many months of living expenses you feel comfortable stashing. Knowing this is in the bank will keep you from using credit cards for “emergencies.” You become your own bank. Tell Visa and Master Card they can kiss your ass! No more sleepless nights worrying. Now if the car breaks or the hot water heater leaks you have the money to handle it.
When all your debt, or all except your mortgage, is gone and you have money saved for “emergencies”, you can start to invest your money in something. What do I invest in, you say? You have to figure that out for yourself. I’m not a fan of the stock market at all. That’s just me. I recommend you invest in someone or something you know that is local to where you live/work/play. Stop sending money to Wall Street strangers and expecting them to have your best interest at heart. They don’t and they won’t. You are responsible for investing and growing your wealth, no one else. You must become your own financial guru. Stop outsourcing it to strangers. Take control and keep it. Teach your kids to do the same thing.
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